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Biling, Blackouts, and the Obligation to Serve

Complex billing is one way to minimize the size and frequency of blackouts.
Fortnightly Magazine - June 2004

hour-by-hour control available via direct interval pricing. But it can be an effective tool in helping to prevent overloads or shortages.

Under peak-pricing programs, utilities grant customers an incentive (generally a price concession) to shift the timing of their peaks or to reduce their number and size. The agreement may be accompanied by such negative incentives as:

  • Significantly higher prices for energy used during a utility's peak periods.
  • Additional charges for peak demand. In some markets, the rate per peak kilowatt can be two orders of magnitude greater than the equivalent non-peak energy.
  • "Ratcheting." This incentive requires customers who even once reach a specific high peak demand to pay a higher price for all energy used during a specific period, or for all energy used for a specific amount of time into the future. Typically, ratchets are calculated using timeframes of a year to two, but they can be longer. In some markets, ratchets are ongoing from the inception of the contract.

Peak-demand programs do not require interval data meters. Non-interval industrial meters commonly have simple peak-demand registers. However, coincidental peak demand is easily and accurately calculated from interval data meters with sufficiently small interval sizes, say 10-15 minutes.

Hedging

Hedges are financial instruments that ensure against price volatility. Hedge sellers collect a fee in exchange for a guarantee to either:

  • Deliver a specific amount of energy (the "hedge cover") to a specific place at a specific price (the "strike price") during a specific interval.
  • Pay the difference between the energy price specified in the hedge (again, the "strike price") and the price the hedge buyer actually has to pay on the wholesale market for the amount of energy specified in the hedge (again, the "hedge cover").*

In a market economy, hedge sellers set the energy price higher than they expect it to be during that interval. From a seller's point of view, the ideal hedge involves a customer who pays a fee and is never heard from again. As the time for delivery/payment nears, however, hedges are commonly resold at discounts or premiums that reflect changing market conditions.

Hedges help customers maintain a stable energy price. But only the largest buyers will want to handle them themselves. Some utilities offer and manage hedges. Others arrange them through a third party. In any event, their costs must be factored into the total cost of energy.

* In practice, this is the more common occurrence.

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